Will Vivus Be Running VICTORY Laps Around Arena?

Until less than a month ago, few had ever heard of Arena Pharmaceuticals (NASDAQ:ARNA), or were aware that it had a patent pending for a weight-loss drug that would ultimately be the first approved by the U.S. Food and Drug Administration in 13 years. But when the FDA made its decision on June 27, Arena became a household name and the focus of some very heated trading.

Of course, the media started covering the much-awaited FDA decision long before June 27, and Arena shares climbed from $2.44 on April 30 to $8.85 on June 26, the day before the FDA approved lorcaserin, which will be sold under the brand name Belviq. Now another pharmaceutical company finds itself in the same boat, the center of a trading frenzy as it awaits its own crucial ruling from the FDA.

Vivus (NASDAQ:VVUS) is a small pharmaceutical company garnering a lot of attention as the FDA’s “Action” date for its obesity drug nears. On July 17, the FDA is expected to announce its decision on Qnexa, an event that is being widely anticipated by Wall Street and Main Street alike. As was the case with Arena, the consensus among analysts is that the drug will be approved, and Vivus share are already trading higher in anticipation.

But investors aren’t just looking at whether Qnexa will be approved — there are a range of factors to be taken into account, including what kind of prescribing restrictions the FDA will place on the new drug if it is approved. If Qnexa can be prescribed to patients similarly to Arena’s Belviq, then the market will erupt in a fury similar to that witnessed last month as they shift focus to the question of who might acquire Vivus, and how much will they pay?

It happens every day — the big guys like Johnson & Johnson (NYSE:JNJ) and Pfizer (NYSE:PFE) buy these small pharmaceutical companies to add to their own offerings, or sometimes simply to smother competition. And they have deep pockets that make it easy to do so.

But IPQ Analytics, an independent research firm, warns that there are risks that aren’t currently being factored into these expectations, including the possibility that the drug’s label (prescribing instructions) could be more strict than Belviq. If so, analyst predictions that the drug could achieve annual sales of a billion or more at peak may be far off base.

According to IPQ, “restrictions on prescribing Qnexa to women of childbearing age and/or those with cardiovascular risk could reduce the market potential of the product, depending on how limiting those restrictions are and how they are implemented.” However, though a risk management program is expected to accompany approval of Qnexa, while Belviq was approved without one, analysts believe that a ‘REMS’ program for Qnexa will have relatively little impact on its use and success.

Still, while approval is certainly the first step, there’s no telling how the drug will be allowed to perform until the FDA gives its prescription. Dr. Michael Liebman, founder of IPQ analytics, says there are real concerns over how the drug may be used in a real-world setting, and that the FDA could “restrict the drug by using a patient registry to protect against abusive use of the durg, combining the drug with other obesity treatments prior to clinical evaluation, or prescribing Qnexa to the wrong patients leading to abuse of the product.”

Watching for these kinds of restrictions is key to investors following the obesity drug market. Heavy restrictions on Qnexa would be good for Arena investors, as they would allow Belviq to remain at the top of the food chain, so to speak, where there’s little real competition. Heavy restrictions would also hurt Vivus’s sale price, if able to find a buyer at all. Conversely, a relatively lax FDA decision would be good news for Vivus, but bad news for Arena, which will suddenly find itself with some real competition in a market that until last month was virtually non-existent.

Shares of Vivus (NASDAQ:VVUS) closed at $28.70, up 5%, while Arena’s (NASDAQ:ARNA) stock priced at $11.11, or up slightly, on Monday.